Navios Maritime Partners Is In Balance Sheet Expansion Mode

| About: Navios Maritime (NMM)


Navios Maritime Partners has paid almost $13/unit in distributions since IPO in 2007. During the "good times", investors praised the CEO for the company's progressive and generous distribution policy.

The distribution was suspended last quarter, as NMM was literally blocked from the equity capital markets, coupled with an all-time low dry bulk market. Investors started cursing the CEO.

The problems started in the summer of 2015 due to fears about China and the devaluation of the yuan. The markets were in panic mode, and MLPs got crushed.

Even though the distribution coverage was sustainable, management took a longer-term view and eliminated the distribution to preserve cash until the storm is over.

Even assuming a 30% haircut on vessels chartered out to Hanjin/HMM, NMM is still comfortably cash flow-positive, which cannot be said for any other listed dry bulk company.

Investors are generally pessimistic about Navios Maritime Partners (NYSE:NMM) for a number of reasons.

  • The sponsor and largest shareholder, Navios Holdings (NYSE:NM), is cash flow-negative, and investors are concerned about possible contagion.
  • Korean charterers Hyundai Merchant Marine (HMM) and Hanjin Shipping (OTC:HNJSF) (together accounting for 40% of NMM's contracted revenue) are facing financial difficulties and are in the process of renegotiating charter contracts.
  • The dry bulk market is still hovering around all-time lows, pressured by concerns about slowing global economic growth and oversupply of vessels.

On a more positive note, NMM is still cash flow-positive to the tune of $80 million per year, which cannot be said for any other dry bulk company. Even Diana Shipping (NYSE:DSX), the most conservative dry bulk company (in terms of chartering policy and balance sheet strength), will turn cash flow-negative.

All of NMM's operating surplus goes to strengthen the balance sheet either by paying down debt (as was the case in Q1 2016) or piling up cash. In other words, it is in balance sheet expansion mode and is the only dry bulk company that can purchase distressed assets from operating cash flow.

Regarding the Hanjin/HMM outcome, for every 10% HMM and Hanjin manage to reduce charter rates, the hit to NMM's free cash flow is around $7 million per annum. So even if a 30% cut is achieved, which is HMM's target figure as reported by the media, the impact on NMM's free cash flow will be $21 million per annum. In other words, its free cash flow will fall to around $50 million per annum, down from $80 million currently. Could have been worse. Details on the contracted revenue and EBITDA contribution from the HMM and Hanjin charters can be found on slide 5 of the Q1 2016 presentation.

Given that NMM is in balance sheet expansion mode, and once the dust settles with HMM and Hanjin, perhaps the only downside remaining is the relationship with NM and the possible contagion effect. However, NM recently cancelled the $50 million loan facility from Navios Maritime Acquisition Corporation (NYSE:NNA) and issued a press release stating that "the Board of Directors of Navios Holdings determined that Navios Holdings does not currently need access to the Revolver". However, NM is still in trouble, and caution is required.

NMM is in currently in "detox mode" by not paying a distribution. Eliminating the distribution was a very painful, but necessary, decision. Management was proactive and prudent, even though many investors felt cheated. Arguably, management lost credibility, as it was committed to an annual distribution of minimum $1.77/ unit through 2016. In Q3 2015, this distribution commitment was changed to 0.85/unit annually for a 5-year period, based on a sustainability analysis. Next quarter (Q4 2015), the distribution was eliminated completely. However, one must ask: What could have management done differently? Keep on paying a hefty distribution whilst there is no access to the equity capital markets, with vessel values falling by the day, putting at risk financial covenants and the entire partnership?

The harsh reality is that things changed really fast in the "dark period" between August 2015 and March 2016. The BDI kept on falling to unprecedented levels (way below the 30-year low), and most importantly, MLPs were is sell-off mode, rendering the cost of equity prohibitive. As a result, many marine MLPs ended up cutting distributions, e.g. Teekay Offshore (NYSE:TOO), Teekay LNG (NYSE:TGP) and Capital Product Partners (NASDAQ:CPLP). NMM took it to the extreme of completely eliminating the distribution. Perhaps this is the best outcome for long-term investors, especially if NMM manages to acquire cheap dry bulk vessels and/or conduct unit buybacks. There is tremendous upside for investors acquiring units at today's depressed prices, which should be realized once market conditions pick up and NMM reinstates a distribution. Until then, NMM will pay down debt and perhaps acquire a few cheap dry bulk assets. It would also make sense for management to consider unit repurchases in order to maximize the distribution per unit to patient long-term unitholders once the market picks up.

Disclosure: I am/we are long NMM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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